RTA Live: September 24, 2015



Real Conversations | Doug Cliggott: ‘An Uncomfortably High Probability of a Significant Correction’

During this wide-ranging, recent Real Conversations interview, prominent Wall Street equity strategist Doug Cliggott sits down to discuss his current market and economic concerns. Cliggott, who was formerly U.S. equity strategist at Credit Suisse and chief investment strategist at J.P. Morgan, shares his ursine investment outlook and cautions against complacency with Hedgeye’s Director of Research Daryl Jones.


Takeaway: This is a great name to buy on an ugly print. Ugly qtr, but financial recovery finally within reach.

We’re not expecting a whole lot of positive news from PIR’s 2Q print (today after the close). EPS is a moving target, and guidance will be light. But when all is said and done we think that the results will show that the financial and operational inflection point for this beaten-down value stock is finally within reach. Are we concerned about a headline miss later today? Yes. We were well aware of these concerns when we added PIR to our Best Ideas list on August 31. Furthermore, we have yet to talk to anyone about this name that is not expecting an ugly quarter. Several analyst notes have already come out calling for a miss, and on top of that, short interest has raced up to 16% of the float – a four-year peak. We think they’ll ultimately be proved wrong.


PIR | LONG WALK ON A SHORT PIR - PIR shortinterest


A key consideration is that CFO Jeff Boyer will handle guidance for the first time after joining the company in late July. It’s not entirely clear how he will handle guidance…but we can’t imagine that he’ll want high targets his first year on the job. We’ve heard this concern from bears as well “new CFO will lower the bar”. Maybe we’d be concerned if the stock was up 20% over the past quarter, but we’re looking at quite the opposite – a 26% decline since the last earnings report in mid-June, and 12% over the past month.  So will guidance be lower? Probably. But it’s very important to note that Boyer is likely to lower because he wants to, not out of necessity. 


Why We Like It – PIR is a beaten-up, ugly value stock…there’s no two ways about it. But with the stock trading at just 0.5x sales – a level it hasn’t sustained in six years -- we think there are two primary questions to ask. 1) Are we going into a major recession? and 2) Is management going to do anything more destructive that would otherwise emulate a major recession? If you answer ‘No’ to both of those questions, then we think it’s a very good risk/reward to buy the stock with $3-$4 down and $20 upside.




Our Answers:

1) We have some major questions marks as it relates to the economy, but we’re not calling for an all-out recession.


2) This is a company that is no stranger to execution issues, but we don’t think that management is about to do anything more that would cause a downturn in the business (especially w/ new CFO taking the seat in late July). Quite the opposite, in fact. Consider this…

  • Over the past three years, PIR gave up 5 points of margin as it played catch-up with its e-commerce business, which stood at only 1% of sales in 2013. Today it is pushing 17%. E-comm will continue to be a headwind as it grows to the mid-30s (about 130bps of dilution over 4 years), but the combination of merch margin recovery and store base rationalization should more than offset the dilution. We think that ~300bps of the margin recoverable.
  • Interestingly enough, in our survey in this report, PIR’s categories ranked as the ones where consumers are most apt to switch sales online. If there is any company that should have invested in e-comm, it is PIR.
  • We’ve had three straight years of elevated capex as the company built out e-comm capabilities. That rolls off this year, with asset consolidation (closing stores) and multi-year margin tailwinds takes RNOA from trough levels at 19% in FY16E to 31% by 2020. That’s a long tail, but even the slightest sign that we’ve found the bottom should make this stock rally.


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

EVENT (TODAY) – P & Web IV: What You Need to Know

Takeaway: Join us TODAY at 12pm and 2pm EDT for a two-part event on the implications of Web IV on P. Dialings instructions below

EVENT (TODAY) – P & Web IV: What You Need to Know - Pandora cartoon



We will be hosting a two-part event TODAY at 12pm and 2pm EDT to discuss both the bull and bear cases.

  1. P: Webcaster IV = Powder Keg (12pm EDT) – Our bearish thesis discussing the implications of the Web IV outcome on P’s business model.
  2. Speaker Series: David Oxenford, Counsel to Webcasting Companies (2pm EDT) – Fire-Side Chat on the relevant Web IV statutes and the Services' arguments.




P: Webcaster IV = Powder Keg (12pm EDT)

  • Challenging Business Model: Limited operational leverage despite operating under lower Pureplay rates
  • Pandora vs. SoundExchange: A review of the Web IV proceeding, the key tenets of each of their arguments, and why P is losing the key debate
  • Powder Keg: We’ll detail a range of potential outcomes, and the limited wiggle room P has without having to restructure its business model
  • Fool's Gold: Why the Copyright Register's decision is not a preliminary victory for P; all it means is that P is just treading water.


Speaker Series: David Oxenford, Counsel to Webcasting Companies regarding CRB proceedings (2pm EDT)

  • Introductory Discussion: Explanation of the relevant statutes regarding the Web IV proceeding (including where may be wrong)
  • Services vs. SoundExchange: Discussion regarding the Services’ primary arguments in the Web IV proceeding
  • Anonymous Q&A: 30-minute session to field your questions


Dialing instructions for both calls are below.  Let us know if you have any questions beforehand.   


Hesham Shaaban, CFA




Participating Dialing Instructions

  • Toll Free:
  • Toll:
  • Confirmation Number: 13620143
  • Materials: CLICK HERE


CHART OF THE DAY: Wait! $90,000,000,000,000 Yen Ain't Working? Cue the Arrows Abe!

Editor's Note: The chart and brief excerpt below are from today's Early Look which was written by Hedgeye CEO Keith McCullough. Click here if you would like to join our contrarian team and begin getting a step or two ahead of consensus.


CHART OF THE DAY: Wait! $90,000,000,000,000 Yen Ain't Working? Cue the Arrows Abe! - z ben 09.24.15 chart


...“So,” since 90 TRILLION Yen in money printing + the 3 arrows of “Abenomics” isn’t working, what did the Japanese announce overnight? “Three More Arrows”!


I seriously couldn’t make that up if I tried. And if a spend more than another sentence on what the 3 “new” policies are, today’s note is going to turn into a joke (1. “Stronger Economy” 2. “Welfare” and 3. “nominal GDP target of 600T Yen”).


Best of luck with that, dudes.


Gaining Insight?

“The goal is to transform data into information, and information into insight.”

-Carly Fiorina


That would (should) be the goal of any coach, captain, or executive. Sadly, it’s not the goal of central planners. They are mostly dogmatic-academic types whose goal is to obfuscate the data into their thesis, and their thesis into more central plans.


Dr. Gary Klein did a great job outlining the risks of ideologues and flawed beliefs in Seeing What Others Don’t. Here’s how he distinguished “successes from failures” in idea generation and decision making (pg 120):


  NO INSIGHT                       <--              -->     GAINED INSIGHT

  1. Gripped by flawed beliefs                    Escaped the fixation of flawed beliefs
  2. Lack of experience                                Experience
  3. Passive Stances                                     Active Stances


If your premise is that a bureaucrat (with no market experience) can part the heavens and smooth economic gravity, you’re gripped by some serious human hubris. If every impotent market policy move is met with more policy moves, there is no insight in that.

Gaining Insight? - campfire cartoon 10.31.2014


Back to the Global Macro Grind


“So”, since 90 TRILLION Yen in money printing + the 3 arrows of “Abenomics” isn’t working, what did the Japanese announce overnight? “Three More Arrows”!


I seriously couldn’t make that up if I tried. And if a spend more than another sentence on what the 3 “new” policies are, today’s note is going to turn into a joke (1. “Stronger Economy” 2. “Welfare” and 3. “nominal GDP target of 600T Yen”).


Best of luck with that, dudes.


In other central-market-planning news this morning the Norwegians have proclaimed their mystery of faith to the world that they can solve for all that is #Deflating in Norway with “rate cuts.” They’re cutting by 25bps to 0.75% and say they “can do more!”


I bet they can!


Europe, meanwhile, is right confused this morning:


  1. Draghi says he doesn’t need to deliver more #cowbell, because #EuropeSlowing isn’t yet clear to him
  2. Weidmann (head of the Bundesbank) says he’s “skeptical” about QE’s impact on the real economy altogether


The problem with the pending Draghi vs. Weidmann debate is that they aren’t debating #GrowthSlowing, yet. As the European data continues to slow, and the German stock market continues to crash (-22% since April), you can bet your Madoff that will change.


In the meantime, what is a Global Macro risk manager of this central-planning experiment gone bad to do?


  1. Stay away from cyclical stocks and “reflation” (locally and globally)
  2. Stay with long-term government bonds
  3. Keep building up that new contrarian Gold position


Yep. Until Draghi starts freaking out Weidmann with more “data/information” (like Sweden and Finland reporting new lows in Producer Price (PPI) #Deflation of -2.2% and -1.1%, respectively, this morning), Euro Up = Dollar Down = Gold Up. I like that.


As you know, I’m all about showing you the love these days. But don’t confuse my love for life, liberty, and free-market capitalism with a love for any trade-able security. My goal is to like/dislike macro positions as they undergo Phase Transitions. That is all.


What could get me to move off of the 0% net asset allocation to Equities in both the US and International markets? That’s simple. The combination of my macro market signals and research information. Until growth stops slowing at an accelerating rate, I’m all set.


Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND research views in brackets) are now:


UST 10yr Yield 2.08-2.20% (bearish)

SPX 1 (bearish)
DAX 9 (bearish)
VIX 19.90-26.62 (bullish)
USD 94.41-96.69 (neutral)
EUR/USD 1.10-1.14 (neutral)

Gold 1120-1148 (bullish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Gaining Insight? - z ben 09.24.15 chart